Variance is the difference between an actual result and a budgeted amount. Variances assist managers in their planning and control decisions. Management by exception is facilitated by variance analysis. Management by exception is the practice of concentrating on areas not operating as anticipated as per plan and giving less attention to areas operating as per plan. Areas with sizable variances are given managerial attention.

Static Budgets and Flexible Budgets

in the case of flexible budgets, planned or budgeted expenses are the actual out multiplied by unit costs or expenses. Flexible budget recognizes that there can be fluctuations in output and hence expenses also vary in a month or a year. Static budget concept which was the older concept did not incorporate this idea. In a static budget, both operating figures, unit expenses and hence total expenses were kept the same during the plan period. But flexible budget concept recognized that, if output goes down, the manager of a department has to cut down his variable expenses and similarly if output goes up he has spend more.

Variance Analysis from Static Budget

Variances can be divided into favorable and unfavorable variances. Example of favorable variance is increased in revenue. Example of unfavorable variance is increase in cost.

3 comments:

Glad to know vast details of variance analysis and how it performs to make flexible budget and management control. Overcoming a business financial planning is highly essential to achieve proper success rate. The finance summary module from PanXpan can definitely help with sharing revenue and expense details. Its a great way to make sure everyone on the team knows whats going on.